A Minnesota LLC needs money. The members vote a capital call. One member does not pay.
Everyone reaches for the statute. The statute is not there.
Chapter 322C — the Minnesota Revised Uniform Limited Liability Company Act — contains no section on capital calls. Searching the chapter’s full text turns up no instance of “capital call,” no “capital account,” no “dilution,” and no “forfeiture.” Contributions appear in exactly three places: a definition at § 322C.0102, subd. 5, a one-sentence section on what may be contributed at § 322C.0402, and a two-subdivision section on liability at § 322C.0403. That is the entire statutory law of the subject.
Which means the operating agreement is not merely important here. It is the governing law. And the standard remedies drafters write into it — dilution at a punitive ratio, forfeiture of the defaulting member’s interest, conversion of equity into a subordinated loan — are damages provisions fixed in advance of a breach. In Minnesota, that puts them squarely inside a doctrine most business lawyers associate with construction delay clauses and non-competes, not with equity: the rule against contractual penalties.
Does Minnesota law require an LLC member to fund a capital call?
No. There is no default obligation to contribute anything, at formation or later.
The chapter says so directly. Minn. Stat. § 322C.0401, subd. 5:
A person may become a member without acquiring a transferable interest and without making or being obligated to make a contribution to the limited liability company.
And the definition of “contribution” is itself entirely derivative of agreement. Under § 322C.0102, subd. 5, a contribution is a benefit provided to the company either in order to become a member (in accordance with an agreement among the initial members, or between the person and the company), or — clause (3) — “in the person’s capacity as a member and in accordance with the operating agreement or an agreement between the member and the company.”
Read those two together and the architecture is clear. Chapter 322C does not impose a funding obligation. It supplies enforcement machinery for an obligation the members created themselves. If the operating agreement does not create one, there is nothing for § 322C.0403 to enforce, and the “capital call” is a request.
That is the most common defect in Minnesota operating agreements contemplating future funding. The agreement authorizes the managers to issue a call, obligates no member to fund one, and then specifies an elaborate consequence for “failure to fund” as though a breach had occurred. No member promised anything, so nothing was breached, and the consequence is not a remedy — it is a repricing imposed on a member who declined an offer.
What § 322C.0403 does once a real obligation exists
Where the operating agreement does create a binding commitment, the statute is unusually hard-edged.
Minn. Stat. § 322C.0403, subd. 1 — headed “Impracticability no excuse”:
A person’s obligation to make a contribution to a limited liability company is not excused by the person’s death, disability, or other inability to perform personally. If a person does not make a required contribution, the person or the person’s estate is obligated to contribute money equal to the value of the part of the contribution which has not been made, at the option of the company.
Two things in that sentence do heavy lifting.
The obligation survives the member. Death and disability are not outs. A committed capital obligation is an estate liability, and a personal representative administering a Minnesota decedent’s estate that includes an LLC interest has to find it. It rarely appears on the schedule of debts, because it is not in a loan file — it is in a governance document nobody sent to the estate lawyer. The same problem, on the other side of the transaction, is why the buy-sell agreement and the estate plan are one instrument.
The cash-out election belongs to the company, not to the defaulting member. A member who promised to contribute a building, a patent license, or services — all permissible under § 322C.0402, which allows contribution of “tangible or intangible property or other benefit … including money, services performed, promissory notes, other agreements to contribute money or property, and contracts for services to be performed” — cannot escape by pleading that the asset is gone or the services can no longer be rendered. The company may take money equal to the value of the unperformed part: a statutory conversion of an in-kind promise into a money claim, exercisable unilaterally.
And a third party can enforce it. § 322C.0403, subd. 2:
A creditor of a limited liability company which extends credit or otherwise acts in reliance on an obligation described in subdivision 1 may enforce the obligation.
That requires reliance. It does not require the company’s cooperation, its consent, or its solvency. A lender shown the members’ funding commitments in diligence has a direct claim on those commitments, independent of anything the company or the other members later agree to.
On the question of compromise, the Minnesota section is silent. Section 322C.0403 has two subdivisions and neither addresses whether the other members may release or reduce a contribution obligation, or what consent that would take. A release is therefore a matter of contract — and nothing in the section suggests a release among the members defeats a creditor who already acted in reliance under subdivision 2. If your agreement will permit compromise of a funding commitment, it must say so and say at what threshold.
Are dilution and forfeiture clauses enforceable in Minnesota?
It depends on whether the clause measures ownership or punishes a breach — and the distinction is sharper than most operating agreements are drafted to survive.
Minnesota’s rule on sums fixed in advance of breach is old, stable, and unfriendly to punitive drafting. In Gorco Construction Co. v. Stein, 256 Minn. 476, 481, 99 N.W.2d 69, 74 (1959), the Minnesota Supreme Court framed the starting posture generously:
Accordingly this court has long regarded provisions for liquidated damages as prima facie valid on the assumption that the parties in naming a liquidated sum intended it to be a fair compensation for an injury caused by a breach of contract and not a penalty for nonperformance.
Then it took most of that back. Id. at 481–82:
In determining the issue neither the intention of the parties nor their expression of intention is the governing factor. The controlling factor, rather than intent, is whether the amount agreed upon is reasonable or unreasonable in the light of the contract as a whole, the nature of the damages contemplated, and the surrounding circumstances.
At 482, the court added that punishing a promisor for breach “without regard to the extent of the harm that he has caused, is an unjust and unnecessary remedy,” and that “a provision having an impact that is punitive rather than compensatory will not be enforced.”
The operative test, at 482–83:
This court has held that where the actual damages resulting from a breach of the contract cannot be ascertained or measured by the ordinary rules, a provision for liquidated damages not manifestly disproportionate to the actual damages will be sustained. On the other hand, when the measure of damages resulting from a breach of contract is susceptible of definite measurement, we have uniformly held an amount greatly disproportionate to be a penalty.
The earlier statement of the same rule, in Meuwissen v. H.E. Westerman Lumber Co., 218 Minn. 477, 483, 16 N.W.2d 546, 549 (1944), is blunter: “The fact that the parties have designated the sum to be paid as liquidated damages is not controlling or conclusive,” and “[f]air compensation for actual damages sustained is the test.”
The procedural posture matters as much as the substance. In Dean Van Horn Consulting Associates, Inc. v. Wold, 395 N.W.2d 405, 407–08 (Minn. Ct. App. 1986), the court of appeals held that although “a liquidated damages clause is prima facie valid, the trial court may hear evidence regarding the reasonableness of the liquidated damages clause,” and that “[b]oth parties must have an opportunity to make a record because liquidated damages clauses must be considered in light of all the circumstances.”
So: prima facie valid, but the label is worthless, the parties’ stated intent is not the test, and the challenger gets an evidentiary hearing.
Applying that to the three clauses drafters actually write
| Clause | What it really is | The penalty question |
|---|---|---|
| Proportionate dilution — percentages recalculated so each member’s share reflects capital actually contributed, at the same per-dollar valuation offered to everyone | Not a damages clause at all. It is arithmetic performed on a capital account. Nothing is fixed in advance of breach; the non-funding member simply owns a smaller fraction of a larger pot | The doctrine has nothing to bite on. There is no “amount agreed upon” to test for disproportion |
| Punitive dilution — the non-funding member’s interest reduced by a multiple of the shortfall, or the funding members’ contribution credited at a steep discount to fair value | A sum fixed in advance of a breach, expressed in equity rather than dollars. Squarely a stipulated-damages provision | This is where Gorco lives. The company’s actual harm from a shortfall is ordinarily measurable — the cost of the substitute capital. A multiplier untethered to that cost is “an impact that is punitive rather than compensatory” |
| Forfeiture — the entire membership interest, or the entire transferable interest, extinguished on failure to fund | The most exposed of the three. The consequence is fixed without reference to the size of the shortfall, so a member who fails to fund the last dollar of a call loses the same interest as one who fails to fund the first | Hardest to defend under the Gorco proportionality inquiry, precisely because the remedy does not scale with the harm |
The drafting lesson falls out of the table. A clause that recalculates ownership by reference to capital actually in the company does not liquidate damages — it measures equity. A clause that adds a punishment on top of that recalculation converts an unassailable mechanic into a stipulated-damages provision that a Minnesota court will scrutinize on a full record and, under Gorco, must invalidate if the impact is punitive rather than compensatory.
Stated honestly: no Minnesota appellate decision consulted for this article applies the penalty rule to an LLC capital-call dilution or forfeiture provision. Gorco, Meuwissen, and Dean Van Horn are general contract cases about stipulated sums. The analysis above applies a settled Minnesota rule to a clause type those courts have not addressed in any decision this article relies on. Treat the outcome as contested, not settled.
Can the diluted member claim oppression instead?
Usually not on the dilution itself — and the reason is a clause inside the definition.
Minnesota’s LLC oppression remedy runs through § 322C.0701, subd. 1(5)(ii), which lets a member ask a court to dissolve where those in control “have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the applicant.” The court may then order something other than dissolution, including “the sale for fair value of all membership interests a member owns” — the buyout remedy discussed in Your LLC Partner Is Freezing You Out.
But “oppressive” is a defined term, and § 322C.0102, subd. 18(a)(3) requires that the conduct be unfairly prejudicial because it frustrated an expectation of the member that, among other things:
(iv) is not contrary to the operating agreement as applied consistently with the contractual obligation of good faith and fair dealing under section 322C.0409, subdivision 4.
An expectation of not being diluted, held by a member whose operating agreement expressly provides for dilution, is contrary to the operating agreement. The definition closes that door — with one hinge left open. The agreement must be applied consistently with the contractual obligation of good faith and fair dealing, which is one of the few things § 322C.0110, subd. 3(5) will not let an operating agreement eliminate, and which § 322C.0409, subd. 4 defines as acting “in a manner, in light of the operating agreement, that is honest, fair, and reasonable.”
So the fight is not whether dilution is permitted. It is whether this call was made honestly. Was there a genuine capital need? Was the amount calibrated to that need or to the minority’s known inability to fund? Was the timing chosen because a member was mid-divorce or mid-liquidity crunch? Section 322C.0102, subd. 18(b)(2) forecloses the easy version of the claim — conduct “is not oppressive solely by reason of a good faith disagreement as to the content, interpretation, or application of the company’s operating agreement” — but not the hard version, which is that the call was engineered.
What to do about it
- Decide whether the agreement creates an obligation or an option, and say which. A committed obligation gets § 322C.0403’s machinery — the estate liability and the creditor’s direct claim. An optional call gets none of it, and a “remedy” for declining an option is not a remedy.
- If you want that machinery, write a promise. “The managers may call capital as needed and each member shall fund its pro rata share” is a promise. “The managers may offer members the opportunity to contribute” is not.
- Make dilution proportionate and valuation-neutral, and delete the multiplier. A 1.5x or 2x dilution credit is the most common punitive term in Minnesota operating agreements and the most vulnerable one. Whatever it buys in deterrence, it costs in enforceability.
- Offer a member loan as the alternative. Advances by funding members, repaid in priority out of distributions, reach the same economics without recharacterizing anyone’s equity — subject to the § 322C.0405, subd. 1 distribution limits, which apply whatever the agreement says.
- Coordinate the death provision with the buy-sell. Section 322C.0403, subd. 1 makes the estate liable by default; if that is not the deal, the agreement must displace it and the buy-sell must price the interest on the same assumption. Address compromise expressly too — the statute does not.
- If you are the member who cannot fund, read whether you actually promised anything, then demand the information before you decide. In a manager- or board-managed company, § 322C.0410, subd. 2(4) requires the company, without demand, to provide “all information that is known to the company and is material to the member’s decision” before a member gives or withholds consent to a matter.
- Build the good-faith record while the call is pending, not after the dilution is booked.
The default architecture these clauses sit inside is covered in Minnesota LLC Operating Agreements; the limits on duty terms in Your Minnesota Operating Agreement Will Be Judged on the Day You Signed It.
The observation
Chapter 322C is a permissive statute, and lawyers who work in it learn to read silence as freedom. On capital calls the silence is nearly total.
But contract freedom in Minnesota has never included the freedom to punish, and a capital-call clause is one of the few places in an operating agreement where the drafter is tempted to write a punishment on purpose — because the whole point is to make non-funding hurt. The way out is to make the consequence follow from the arithmetic rather than from the breach. A member who does not put in capital owns less of a company that now has more capital. That is not a penalty; it is what ownership means. Every dollar layered on top of that is a dollar a Minnesota court will be asked to measure against the company’s actual harm — on a full evidentiary record, with the label the drafter chose expressly declared not controlling.
Madgett Law, LLC drafts and litigates Minnesota LLC operating agreements, including capital-call, dilution, and default provisions, and represents both companies enforcing funding commitments and members facing dilution. If a call has been issued, or you are writing the clause that will govern one, send us a message or call 612-470-6529.
Sources: Minn. Stat. § 322C.0102 (definitions) — subd. 5 (definition of “contribution,” including clause (3), a benefit provided in the person’s capacity as a member and in accordance with the operating agreement or an agreement between the member and the company); subd. 18(a)(3)(iv) (an expectation qualifying under the “oppressive” definition must not be contrary to the operating agreement as applied consistently with the contractual obligation of good faith and fair dealing) and subd. 18(b)(2) (conduct is not oppressive solely by reason of a good faith disagreement about the operating agreement). Minn. Stat. § 322C.0401, subd. 5 (a person may become a member without acquiring a transferable interest and without making or being obligated to make a contribution). Minn. Stat. § 322C.0402 (form of contribution). Minn. Stat. § 322C.0403 — subd. 1 (impracticability no excuse; death, disability, or other inability to perform personally; the person or the person’s estate obligated to contribute money equal to the value of the unmade part, at the option of the company); subd. 2 (a creditor that extends credit or otherwise acts in reliance on the obligation may enforce it). The section contains no provision addressing compromise of a contribution obligation. Minn. Stat. § 322C.0405, subd. 1 (limitations on distribution). Minn. Stat. § 322C.0409, subd. 4 (contractual obligation of good faith and fair dealing). Minn. Stat. § 322C.0410, subd. 2(4) (company must provide, without demand, information material to a member’s decision before consent is given or withheld). Minn. Stat. § 322C.0110, subd. 3(5) and subd. 4(5) (good faith and fair dealing may not be eliminated; standards for measuring its performance may be prescribed). Minn. Stat. § 322C.0701, subd. 1(5)(ii) and subd. 2 (oppression ground and alternative remedies, including sale for fair value). All from the Minnesota Office of the Revisor of Statutes, 2025 Minnesota Statutes; the Revisor’s section histories for §§ 322C.0102, 322C.0401, 322C.0402, 322C.0403, 322C.0405, 322C.0409, 322C.0410, 322C.0110, and 322C.0701 show no session-law entries after 2015 except § 322C.0102 (2015 c 21) and § 322C.0110 (2015 c 39), with no 2025 or 2026 entries. A full-text search of chapter 322C returned no occurrence of “capital call,” “capital account,” “dilution,” or “forfeiture.” Case law: Gorco Construction Co. v. Stein, 256 Minn. 476, 481–83, 99 N.W.2d 69, 74 (1959) (liquidated damages prima facie valid; neither the parties’ intention nor their expression of intention is the governing factor; a provision punitive rather than compensatory will not be enforced; disproportion where damages are susceptible of definite measurement is a penalty); Meuwissen v. H.E. Westerman Lumber Co., 218 Minn. 477, 483, 16 N.W.2d 546, 549 (1944) (the parties’ designation is not controlling or conclusive; fair compensation for actual damages sustained is the test); Dean Van Horn Consulting Associates, Inc. v. Wold, 395 N.W.2d 405, 407–08 (Minn. Ct. App. 1986) (trial court may hear evidence on reasonableness; both parties must have an opportunity to make a record; clauses considered in light of all the circumstances). Case texts read from the Caselaw Access Project (static.case.law). No Minnesota appellate decision consulted for this article applies the penalty doctrine to an LLC capital-call dilution or forfeiture provision.
This article is general legal information about Minnesota law, not legal advice, and reading it does not create an attorney–client relationship. Whether a particular capital-call, dilution, or forfeiture provision is enforceable depends on the operating agreement, the company’s circumstances, and the record made about them. No outcome is promised or implied.